Learning objectives: Calculate a forward foreign exchange rate using the interest rate parity relationship. Define income, storage costs, and convenience yield. Calculate the futures price on commodities incorporating income/storage costs and/or convenience yields.
Questions:
717.1. Near the end of July, the settlement price for the August Mexican Peso Futures contract is MXN/USD $0.050 where USD is the quote currency and MXN is the base currency; i.e., USD $0.0500 per one Peso, or equivalently, 20.0 Pesos per one US dollar which would be represented by USD/MXN 20.0. If the November MXN/USD futures contract--which is three months (T = 0.25 years) forward--settlement price is $0.0490, and if we assume interest rates are expressed per annum with continuous compounding, then what does interest rate parity (IRP) predict for the difference between short-term interest rates in Mexico and the United States? (note: variation on Hull Problem 5.13).
a. No difference
b. + 2.63% per annum
c. + 5.05% per annum
d. + 8.08% per annum
717.2. Assume we can express the storage cost of corn as a constant proportion of the spot price. If the storage costs suddenly increased from 9.0% per annum (e.g., $0.36 per bushel when the spot price of corn is $4.00 per bushel) to 17.0% per annum (e.g., $0.68 per bushel when the spot price of corn is 4.00 per bushel), which is nearest to the predicted PERCENTAGE INCREASE in the price of a six-month (0.5 years) corn forward contract?
a. Zero
b. + 4.08%
c. + 8.33%
d. Not enough information (need risk-free rate and exact spot price)
717.3. You are trying to model the theoretical forward price of silver using the cost of carry model. Your model is informed by the following four propositions. Each is correct except which is FALSE?
a. Storage costs can be treated as negative income in the cost of carry model
b. Investment assets have a positive convenience yield in futures markets due to the optionality of liquid markets
c. A positive (negative) lease rate tends to contributes to backwardation (contango) in the gold futures curve, ceteris paribus
d. Normal backwardation in a consumption commodity could be explained by some combination of non-zero convenience yield and/or systemic risk (i.e., positive beta) of the commodity
Answers here:
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